Westlake Chemical Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 22, 2017. This is an annual report, not a standalone quarterly filing. Westlake manufactures chemicals, polymers and building products through its Olefins and Vinyls segments. Axiall was acquired on August 31, 2016, so 2016 results include its operations from that date.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $5.075 billion | $4.463 billion |
| Gross profit / margin | $980.6 million / 19.3% | $1.185 billion / 26.6% |
| Income from operations | $581.5 million | $959.8 million |
| Net income attributable to Westlake | $398.9 million | $646.0 million |
| Diluted EPS | $3.06 | $4.86 |
| Operating cash flow | $833.9 million | $1.079 billion |
| Capital expenditures | $628.5 million | $491.4 million |
| EBITDA (non-GAAP) | $1.016 billion | $1.244 billion |
At December 31, 2016, cash and cash equivalents were $459.5 million, restricted cash was $160.5 million, and working capital was $1.225 billion. Total debt, including current maturities, was approximately $3.8 billion, or about 50% of total capitalization. The company had $598.5 million of borrowing availability under its $1.0 billion unsecured revolving credit facility and reported compliance with its financial covenant. The $150 million term loan outstanding at year-end was repaid in January 2017.
Fourth-quarter 2016 net sales were $1.735 billion, operating income $152.7 million, net income attributable to Westlake $98.9 million and diluted EPS $0.76. Fourth-quarter 2015 comparatives were $986.8 million, $181.1 million, $111.0 million and $0.84, respectively.
Material changes versus prior year
- Annual sales rose 13.7%, mainly from Axiall and higher PVC resin volumes; overall average sales prices fell 6.4%, while company sales volumes increased 20.1%, primarily due to the acquisition.
- Operating income fell $378.4 million and attributable net income declined $247.2 million. Lower prices, acquisition and integration costs, and lost production and fixed-cost absorption from outages and turnarounds outweighed lower feedstock and energy costs and stronger European product margins.
- Olefins sales declined 16.2% to $1.894 billion and segment operating income fell to $557.8 million from $747.4 million. Vinyls sales increased 44.4% to $3.182 billion, mainly reflecting Axiall, but segment operating income declined to $174.1 million from $254.5 million.
- Cash from operations decreased $244.9 million. Investing cash use increased substantially, principally due to $2.438 billion, net of cash acquired, for Axiall. Debt and assets increased significantly following the acquisition.
Outlook, commentary, risks and unusual items
- Management described the U.S. and global economy as slowly improving but noted that weak U.S. construction demand and European economic conditions could continue to weigh on Vinyls. New industry capacity could pressure Olefins margins. The filing provides no specific earnings or revenue guidance.
- Management cited lower crude oil prices as reducing the cost advantage of North American ethane-based producers versus naphtha-based competitors. Feedstock and energy volatility, commodity pricing lags, supply-demand cycles, and customer demand remain key uncertainties.
- Reported 2016 results included $103.7 million of transaction and integration costs; approximately $155.1 million of unabsorbed fixed manufacturing and other turnaround/outage costs; and a $49.1 million gain on previously held Axiall shares. A lower 24.8% effective tax rate also benefited from $46.9 million of discrete tax items.
- Major operating interruptions included the Lake Charles Petro 1 turnaround and expansion and a Calvert City mechanical outage from June to mid-July. Petro 1’s expansion added approximately 250 million pounds of annual ethylene capacity. The Calvert City expansion, expected to add approximately 100 million pounds annually, was targeted for completion in the first half of 2017.
- The company identified acquisition integration, higher debt and interest expense, cyclicality, raw-material and energy costs, operational and environmental incidents, and execution of capital projects as material risks. LACC, a 10%-owned ethylene project with Lotte, had a maximum Westlake commitment of $225 million; approximately $59.4 million had been funded by year-end, with startup anticipated in the first quarter of 2019.
- Environmental contingency reserves were approximately $48.8 million at year-end; additional reasonably possible environmental losses were estimated at $40 million to $80 million. The filing states that known legal and regulatory matters were not expected, in aggregate, to materially adversely affect the consolidated financial statements.
- Management and the auditor concluded internal control over financial reporting was effective, but Axiall—representing 52.3% of year-end assets and 19.1% of annual sales—was excluded from the 2016 control assessment because it had been acquired during the year.
Important facts for investors to verify
- Whether Axiall integration delivers expected operating efficiencies and synergies, and how much further integration or restructuring expense is incurred.
- Debt repayment, leverage, interest expense, covenant headroom, and the sustainability of dividends after acquisition financing.
- Operating performance and margins after the reported outages and turnarounds, including the status and economics of the Petro 1 and Calvert City expansions.
- Progress, total cost, funding requirements and schedule for the LACC project, including exposure to cost overruns and the terms of Westlake’s ownership and call option.
- Resolution and potential cost of environmental matters, including the disclosed $40 million to $80 million range of additional reasonably possible losses.
- Cash conversion and capital needs: 2016 operating cash flow was below capital expenditures, before acquisition spending and dividends.